1. On 24 August 2004, just four months after the commencement of its investigation into the matter, the FSA publicised a Final Notice issued to the "Shell" Transport and Trading Company, p.l.c ("STT") and the Royal Dutch Petroleum Company NV ("Royal Dutch") ("the Final Notice") (Tab 1) imposing a financial penalty of £17 million for market abuse and breach of the Listing Rules in respect of alleged misstatements of the proved reserves of the Royal Dutch/Shell Group of Companies ("Shell"). On the same day, the United States Securities and Exchange Commission (SEC) publicised an administrative cease and desist Order against STT and Royal Dutch ("the SEC Order") (Tab 2) and obtained a financial penalty of $120 million.

2. In issuing the Final Notice the FSA has breached its duties under section 393 of the Financial Services and Markets Act 2000 ("FSMA") by making findings which both identify and prejudice the Applicant and by unfairly denying him his right to make representations and review material in respect of the FSA’s findings prior to their publication. In doing so the FSA has also unfairly pre-judged matters that remain in issue in its ongoing investigation in relation to the Applicant.

The FSA’s Final Notice identifies and prejudices the Applicant

3. Despite not referring to the Applicant specifically by name, the reasons for the FSA’s decision contained in the Final Notice relate to matters which identify the Applicant. The Applicant can readily be identified by reference to other publicly available and easily accessible sources, including in particular, the SEC Order and the Executive Summary of the Davis Polk & Wardwell ("Davis Polk") report on its investigation into Shell’s proved reserves recategorisations. As the FSA and SEC collaborated in issuing their respective decisions, it is apparent that the FSA had prior knowledge that the Applicant would be identified in the SEC Order.

4. In addition, the FSA’s Final Notice and the SEC Order criticise "EP management" only for the period after the Applicant became head of the Exploration and Production ("EP") business of Shell and criticise the Committee of Managing Directors ("CMD") of Shell for the period after the Applicant became Chairman of CMD. This is despite the fact that a substantial portion of the proved reserves which were de-booked in 2004 had been booked before the Applicant became head of the EP business.

5. The matters which identify the Applicant are highly prejudicial to the Applicant and there was no reasonable basis for the FSA to conclude otherwise. As more fully set out below, the Applicant has been identified and prejudiced by the FSA’s statements regarding:

5.1 Shell’s announcements on reserves;

5.2 Shell’s "inadequate internal controls";

5.3 revisions to Shell’s Guidelines in 1998;

5.4 "indications" in 2000 and 2001; and

5.5 "warnings" in 2002 and 2003.

6. Corporate entities act and can engage in market abuse only through individuals. Therefore, the FSA’s Final Notice identifies and prejudices the Applicant to the extent that it attributes to Shell facts and activities publicly known to have been associated with the Applicant. The FSA cannot evade the fairness protections afforded to the Applicant under section 393 of the FSMA simply by avoiding the explicit naming of the Applicant in the Final Notice.

7. The Applicant has also been the subject of extensive damaging comment in the media which has associated him with the findings in the Final Notice. For example:

7.1 The Daily Telegraph reported on 28 August 2004 at page 34 as follows:

"Neither the SEC nor the FSA named individuals in their reports, which explained the reasons for their respective $120m (£67m) and £17m fines against Shell, but they hardly needed to.

Their reports go back much further than the report that Shell itself commissioned from US law firm Davis Polk & Wardwell, and by implication, embrace those former executives … That report concentrated on Sir Philip Watts … " (Emphasis added).

7.2The Mail on Sunday reported on 29 August 2004 at page 4 of the business supplement as follows:

"DAMNING reports from financial regulators on both sides of the Atlantic last week made clear that Shell had known it was overstating oil reserves as long ago as 2000, but ploughed on in the most cynical way to keep its investors happy.

The company's most senior executives were involved in this brazen deception. Three, including disgraced former chief Sir Philip Watts, have been ousted."

The FSA has breached section 393 of the FSMA

8. Despite requesting copies of any notice from the FSA on 26 July, 29 July and 17 August 2004, the FSA refused to disclose any notices to the Applicant prior to the publication of the Final Notice. These requests were made for the express purpose of advising the Applicant as to his statutory rights under section 393 of the FSMA.

The FSA’s findings are flawed

9. If the Applicant had been given the opportunity to make representations the opinions expressed by the FSA that relate to him would have been shown to be fundamentally flawed, due in part to the fact that they are based on an investigation that the FSA has yet to complete. In particular (subject to obtaining disclosure of evidence from the FSA in the Tribunal proceeding and without prejudice to any additional matters that the Applicant may seek to raise):

9.1 The FSA states that Shell’s announcements of proved reserves throughout 1998 to July 2004 were false or misleading, that it either knew or ought to have known they included reserves which were non-compliant with SEC Rule 4-10 and that it failed to put in place or to maintain adequate internal guidelines and adequate internal controls. These concluded opinions do not take any or adequate account of the following:

(a) the judgments required to apply Rule 4-10, which defines proved reserves as those "estimated quantities" of oil and gas "reasonably certain" to be recoverable in the future from "known reservoirs under existing economic and operating conditions, i.e., prices and costs as ofthe date the estimate is made." The application of this rule requires inherently subjective judgments by oil and gas producers;

(b) the "guidance" of 31 March 2001, relied upon by the FSA in describing Rule 4-10’s requirements, is non-binding staff guidance for which the SEC expressly "disclaims responsibility";

(c) the annual reviews undertaken within Shell of its own internal guidelines for assessing proved reserves, which included assurance from Shell’s EP business and from Shell’s external auditors that the guidelines complied with SEC requirements (including, in particular, the revision of the Shell guidelines in September 1998); and

(d) the annual process established within Shell for the assessment and disclosure of proved reserves, which included review by the EP Group Hydrocarbons Resource Coordinator, the Group Reserves Auditor and Shell’s external auditors as well as formal assurances provided by EP executives.

9.2 The FSA’s view that "Shell did not follow-up indications in 2000 and 2001 that its disclosed proved reserves were false or misleading" is inaccurate as it relates to the Applicant in that it is based on an internal presentation on 31 January 2000 to a meeting of EP management (which, at the time, included the Applicant). In particular:

(a) the FSA’s suggestion that the Reserve Replacement Ratio ("RRR") of 37% in that presentation was "robustly rejected and on 11 April 2000 Shell announced an RRR for 1999 of 56%" is unfair and misleading in that it suggests that the Applicant disregarded the figure of 37% not on the merits but out of a desire simply to report a higher RRR figure;

(b) in fact, the 56% figure was based on reasoned judgments to accept most but not all of the "recommendations" in the presentation. Those judgments were reviewed by Shell’s external auditors and, as far as the Applicant is aware, have not been called into question by Shell’s subsequent restatements of proved reserves;

(c) contrary to the FSA’s findings, the presentation contains no reference to production forecasts in Nigeria being "reverse engineered" solely to support reserves figures. The recommendations in the presentation concerning Nigeria were accepted by EP management; and

(d) with respect to all the recommendations made in the 31 January 2000 presentation, the Applicant acted in good faith.

9.3 The FSA’s finding that "Shell did not follow up warnings in 2002 and 2003 that its disclosed proved reserves were false or misleading" is inaccurate in that it is based on information provided to the Applicant in the "internal Shell memorand[a]" prepared by EP and dated 11 February 2002, 18 July 2002 and 17 July 2003 which went to the CMD and are referred to in the Final Notice. To the extent that any concerns were expressed in these documents about Shell’s reserves, the Applicant acted appropriately and in good faith in addressing those concerns. In any event, these documents contained no warnings that reserves information previously announced by Shell was false or misleading. On the contrary, the Applicant was advised that there was no need for any restatement of the company’s published reserves information. In particular:

(a) the Note to CMD of 11 February 2002 confirmed that reserves information for the previous year had been "cleared by external audit" and did not warn that that information was false or misleading. In response to indications in that Note of potential future "exposures" related to new SEC guidance on proved reserves and potential licence expiry issues, the Applicant asked that EP report back to CMD in six months time, rather than awaiting the next annual reporting cycle;

(b) that follow up report was the Note for Discussion of 18 July 2002. At the meeting of CMD at which this Note was discussed, the Applicant specifically asked whether any de-bookings were required and was advised that it was unlikely that any de-bookings would be required in the short-term. The Applicant requested "high transparency" on these matters;

(c) in the period between July 2002 and the presentation to CMD of the memorandum of 17 July 2003, Shell conducted its annual process for assessing and reporting on reserves. As usual, that process included reviews by the Group Hydrocarbons Resource Coordinator, the Group Reserves Auditor and the external auditors. They specifically addressed the issues that EP raised in 2002. Based on a legal opinion, which was also reviewed by Shell’s external auditors, the Nigeria SPDC licence extension issue was no longer a concern. Each of the issues concerning "reasonable certainty" that later resulted in substantial de-bookings were also addressed. In addition, EP had modified Shell’s guidelines for booking proved reserves. At the conclusion of the reviews by the EP business, the Group Reserves Auditor, Group Finance, and the external auditors, the external auditors specifically opined to CMD and the Group Audit Committee that the reserves materially complied with applicable requirements; and

(d) the Note to CMD of 17 July 2003 advised that no de-bookings were required. In order to ensure full transparency of the issues relating to reserves as presented to CMD, the Applicant asked that EP make a report to the Group Audit Committee. EP did so, describing the same reserves issues in its memorandum dated 26 August 2003, which went as a Note For Information to CMD on 1 September and was discussed at a meeting of the Group Audit Committee on 21 October attended by the external auditors. No objections were raised with respect to Shell’s reserves reporting and Shell’s prior bookings.

9.4 By its own admission, the FSA, like Davis Polk in its Executive Summary, has failed to take account of the reasonableness of Shell’s reliance on the review of reserves information performed by the external auditors in reaching findings as they relate to the Applicant. However, the FSA’s findings are inconsistent with the Applicant having reasonably relied on the work of the external auditors.

9.5 Contrary to the conclusions in the FSA’s Notice, at no time prior to November 2003 was the Applicant informed by Shell’s experts in oil and gas reserves estimation, including its reservoir engineers at operating units, the Group Hydrocarbon Resource Coordinator’s staff, the Group Reserves Auditor and Shell’s external auditors, that Shell’s statements of proved reserves were false or misleading or that there was a need for significant de-bookings.

9.6 Once CMD was alerted, on 18 November 2003, to unsatisfactory audits in respect of Nigeria SPDC and Oman, the Applicant took steps to establish a thorough review of Shell’s reported reserves. It was this review that led to the announcement by Shell on 9 January 2004 of the recategorisation of significant volumes of reserves.

10. Therefore, the Applicant rejects the findings made by the FSA outlined above and asserts that he conducted himself properly in all respects.

The Applicant refers the matter to the Tribunal

11. Accordingly, pursuant to section 393(11) of the FSMA, the Applicant refers to the Tribunal:

11.1 the failure of the FSA to give him a copy of the Decision Notice;

11.2 the decision in question insofar as it is based on reasons that relate to matters that identify and are prejudicial to the Applicant; and

11.3 the opinions expressed by the FSA in relation to him in the Decision Notice.

12. The Applicant asks that the Tribunal:

12.1 find that the Applicant was identified and prejudiced by the Final Notice and should have been given a copy of the Decision Notice;

12.2 make findings on the evidence available to the FSA as at the date of the Decision Notice and such other evidence it becomes aware of from the Applicant during the course of the proceedings; and

12.3 direct that the FSA amend the reasons stated in the Final Notice to reflect the Tribunal’s findings on the evidence.

BACKGROUND

13. The Applicant joined Shell in 1969. The Applicant is not an expert in the estimation of reserves or SEC reporting. Between 1 July 1997 and 30 June 2001, the Applicant was the Non-Executive Chairman of the EP Business Committee, which role was converted from 1 January 1999 to Chief Executive Officer of the EP Executive Committee ("ExCom"). The Applicant was also appointed to CMD on 1 July 1997. On 1 July 2001, the Applicant became the Chairman of CMD and the Chairman of the STT Board and served in these roles until 3 March 2004.

14. On 3 March 2004, the Applicant was invited to tender his resignation as a result of the preliminary findings of an investigation into the proved reserves recategorisation announced by Shell on 9 January 2004 conducted by Davis Polk for Shell’s Group Audit Committee. An Executive Summary of Davis Polk’s report to the Group Audit Committee (Tab 3) was published on Shell’s public website on 19 April 2004. At no stage prior to his resignation or the publication of the Executive Summary was the Applicant given sight of or an opportunity to comment on Davis Polk’s findings. Indeed, the Applicant has been refused a copy of Davis Polk’s notes of their interview with him. The Applicant has still not had access to the full report of Davis Polk’s investigation, which has been provided to the FSA.

15. Shortly after the publication of the Davis Polk report, on 23 April 2004 the FSA commenced a formal investigation in relation to the proved reserves recategorisation by Shell. On 27 May 2004, the FSA notified the Applicant in writing of its investigation. The Applicant has fully co-operated with the FSA’s investigation. The FSA has confirmed that its investigation in relation to the Applicant is continuing.

16. On 29 July 2004, just three months after the commencement of the FSA’s investigation, Shell announced that it had reached agreements in principle with the FSA and the staff of the SEC. Pursuant to that agreement Shell would agree to the entry of a Final Notice by the FSA "without admitting or denying the FSA’s findings or conclusions". A copy of the announcement is enclosed at Tab 4.

17. On 24 August 2004, the FSA published a Final Notice of its decision to impose a penalty on Shell and Royal Dutch. Despite requests from the Applicant’s solicitors on 26 July, 29 July and 17 August 2004, the FSA refused to provide the Applicant with sight of any notice in respect of the company in advance of the publication of the Final Notice. A copy of the relevant correspondence is enclosed at Tab 5.

18. The FSA’s Final Notice gave effect to a Decision Notice issued by the FSA to Shell on 13 August 2004. The Applicant has not had access to the Decision Notice. For the purposes of this reference the Applicant has assumed that the terms of the Decision Notice do not materially differ from the Final Notice.

19. The publication of the Final Notice resulted in extensive media coverage, much of which included reference to the Applicant. A copy of a selection of press articles in relation to the Final Notice is enclosed at Tab 6.

STATUTORY RIGHTS OF THIRD PARTIES TO FAIRNESS

20. The FSMA contains a carefully crafted regime to ensure fairness to third parties affected by notices issued by the FSA and which cannot be evaded simply by avoiding the explicit naming of the third party in the notice.

21. The Final Notice imposed a financial penalty for market abuse and for breach of the Listing Rules. If the FSA proposes to take action against a person in respect of market abuse and breach of the Listing Rules, the FSA is required to give that person a Warning Notice under sections 126(1) and 92(1) of the FSMA.

22. Similarly, if the FSA decides to take action against a person in respect of market abuse and breach of the Listing Rules, the FSA is required to give that person a Decision Notice under sections 127(1) and 92(4) of the FSMA. After receiving a Decision Notice, the person may refer the matter to the Tribunal under sections 127(4) and 92(7) of the FSMA.

23. In the absence of a reference of the Decision Notice to the Tribunal, the FSA must give the person a Final Notice under section 390(1) of the FSMA. The FSA may publish such information about the matter to which a Final Notice relates as it considers appropriate: section 391(4).

24. Section 393 applies to a Warning Notice given in accordance with sections 126(1) and 92(1) of the FSMA and to a Decision Notice given in accordance with sections 127(1) and 92(4) of the FSMA: sections 392(a), (b).

25. Section 393 deals with third party rights in respect of FSA notices. The purpose of section 393 is to ensure fairness where there is some wrong-doing alleged on the part of a third party who is not himself the subject of action by the FSA. During the passage of the legislation in Parliament Lord Bach explained the purpose of the provisions as follows:

"…it was felt that action might be taken against a firm for reasons which implied that there has been some failing by one of its directors or employees …

The provisions give third parties, who are identified in prejudicial terms in the reasons for a warning or decision notice, the right to receive a copy of the notice, and to make representations or refer the matter to the tribunal in the same way as the person who is the subject of the FSA’s proposed action. We took the view that although these rights create an administrative burden for the FSA, they are necessary to give the third party the right to defend himself against any implied blame arising from the reasons given for the action." (Emphasis added) (Lords Hansard, 30 March 2000 at column 1026).

26. Section 393(1) requires the FSA to give a copy of a Warning Notice to a person other than the person to whom the notice is given (the third party) if any of the reasons contained in the Warning Notice relates to a matter which:

(a) identifies the third party, and

(b) in the opinion of the FSA, is prejudicial to the third party.

27. Pursuant to section 393(2), the FSA is not required to give the Warning Notice to the third party if the FSA:

(a) has given him a separate Warning Notice in relation to the same matter; or

(b) gives him such a notice at the same time as it gives the Warning Notice which identifies him.

28. Section 393(3) provides that the Warning Notice must specify a reasonable period (which may not be less than 28 days) within which he may make representations to the FSA.

29. Section 393(4) requires the FSA to give a copy of a Decision Notice to a third party if any of the reasons contained in the Decision Notice relates to a matter which:

(a) identifies the third party, and

(b) in the opinion of the FSA, is prejudicial to the third party.

30. If the Decision Notice was preceded by a Warning Notice, a copy of the Decision Notice must (unless it has been given under section 393(4)) be given to each person to whom the Warning Notice was copied: section 393(5).

31. Pursuant to section 393(6), the FSA is not required to give a copy of a Decision Notice to a third party if the FSA:

(a) has given him a separate Decision Notice in relation to the same matter; or

(b) gives him such a notice at the same time as it gives the Decision Notice which identifies him.

32. The FSA is not required to give a Warning Notice or a Decision Notice to a third party if the FSA considers it impracticable to do so: section 393(7).

33. Sections 393(9) to 393(11) apply if the person to whom a Decision Notice is given has a right to refer the matter to the Tribunal: section 393(8).

34. Section 393(9) provides that a person to whom a copy of the Decision Notice is given may refer to the Tribunal:

(a) the decision in question, so far as it is based on a reason of the kind mentioned in section 393(4); or

(b) any opinion expressed by the FSA in relation to him.

35. The Decision Notice must be accompanied by an indication of the third party’s right to make a reference under section 393(9) and of the procedure on such a reference: section 393(10).

36. Section 393(11) provides that a person who alleges that a copy of the Decision Notice should have been given to him, but was not, may refer to the Tribunal the alleged failure and:

(a) the decision in question, so far as it based on a reason mentioned in section 393(4); or

(b) any opinion expressed by the FSA in relation to him.

37. Section 394 deals with the right of access to the material on which the FSA relied. Section 394 applies to a third party as it applies to the person to whom the notice was given, insofar as the material which the FSA must disclose under section 394 relates to the matter which identifies the third party: section 393(12).

38. Pursuant to section 394(1), the third party must be allowed:

(a) access to the material on which the FSA relied in taking the decision which gave rise to the obligation to give the notice;

(b) access to any secondary material which, in the opinion of the FSA, might undermine that decision.

THE FSA’S FINAL NOTICE IDENTIFIES AND PREJUDICES THE APPLICANT

39. The reasons contained in the Final Notice relate to matters which identify the Applicant and are prejudicial to him. The Applicant points out that the statutory test is not whether the stated reasons identify the Applicant. The statutory test is much more general, and liberal: whether the stated reasons relate to a matter which identifies the Applicant. Although the Applicant is not referred to by name in the Final Notice, he can readily be identified by reference to other publicly available and easily accessible sources, including, in particular, the SEC Order and the Executive Summary of the Davis Polk report as well as Shell’s public filings.

40. The FSA and SEC collaborated in issuing their respective decisions. The language of the Final Notice and the SEC Order is also identical in many respects (see, for example, Tab 7). However, unlike the Final Notice, the SEC Order specifically refers to the Applicant by job title. Accordingly, the FSA had prior knowledge that the SEC Order identified the Applicant. The identification of the Applicant was contrary to a written assurance by the FSA on 23 August 2004 that it was satisfied, even in the light of publicly available information, that the notice did not identify the Applicant.

41. The FSA Final Notice and the SEC Order criticise "EP management" only for the period after the Applicant became head of EP and criticise CMD only for the period after the Applicant became Chairman of CMD. The FSA did not address the fact that a substantial portion of proved reserves which were recategorised in 2004 had been booked before the Applicant became head of the EP business.1

42. The Applicant was identified and prejudiced in the following ways:

Shell’s announcements on reserves

43. Paragraph 61 of the Final Notice states:

"The behaviour of Shell considered by the FSA to amount to market abuse is:

(a) Shell’s announcements of its hydrocarbon reserves throughout the period 1998 to July 2004 in which Shell disseminated false or misleading information as to the true extent of its proved reserves;

(b) as a result of announcing false or misleading proved reserves information, Shell announced false or misleading reserves replacement ratios for each year in the period 1997 to 2002 inclusive …"

44. Paragraph 75 of the Final Notice states:

"(a) Shell reported proved reserves which it either knew or ought reasonably to have known included reserves that were non-compliant with Rule 4-10;

(b) Shell was either reckless or took insufficient care as to the compliance of its reported reserves with Rule 4-10 …"

45. The announcements of proved reserves referred to are contained in Shell’s annual reports on Form 20-F for the years in question, which are publicly available.

46. Shell annual report on Form 20-F for 2002 included a certification by the Applicant that, based on his knowledge, the annual report did not contain any untrue statement of a material fact or omit a material fact necessary to make the statements made not misleading.

47. Between 1997 and 2001, the Applicant was identified in Shell’s annual reports and the Forms 20-F as being responsible for and the Chief Executive Officer of EP.

48. The Applicant is therefore identified as one of those responsible for announcements referred to in paragraph 61 of the Final Notice. The FSA’s concluded opinions that those announcements were in fact false or misleading, its views as to Shell’s knowledge and recklessness and the reasons in the Final Notice on which those opinions are based are therefore directly prejudicial to the Applicant.

Shell’s "inadequate internal controls"

49. At paragraph 61 of the Final Notice, the FSA states:

"The behaviour considered by Shell to amount to market abuse is:

…

(c) Shell failed to put in place or to maintain adequate internal guidelines accurately to assess the extent of its proved reserves throughout the period 1998-2003 inclusive;

(d) Shell failed to put in place or to maintain adequate internal controls in relation to its proved reserves reporting and disclosure throughout the period 1998 to July 2004 …"

50. Paragraph 75 of the Final Notice states:

"(d) Shell failed to maintain adequate controls over its reserves estimation and reporting processes. Shell also failed in several respects to implement and maintain internal controls sufficient to provide reasonable assurance that it was estimating and reporting proved reserves accurately and in compliance with applicable requirements."

51. The Final Notice goes on to give further particulars of the alleged failures, including a finding that "the Group Reserve Auditing function was deficient and ineffective". The Final Notice also states that "the [Group Reserves Auditor] reported to the management of Shell’s EP business".

52. Paragraph 76 of the Final Notice states:

"Shell’s overstatement of proved reserves, and its delay in correcting the overstatement, resulted from:

…

(b) the failure of its internal reserves estimation reporting guidelines to conform to the requirements of Rule 4-10; and

(c) the lack of effective internal controls over the reserves estimation and reporting process."

53. In Shell’s annual report on Form 20-F for 2002 the Applicant certified that:

"The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures … for the registrant and have:

(a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities …

(b) evaluated the effectiveness of the registrant’s disclosure controls and procedures …; and

(c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation …"

54. The FSA’s findings in relation to the adequacy of Shell’s internal guidelines and controls in relation to proved reserves reporting and disclosure therefore relate to matters that identify the Applicant in that his responsibility, as Chairman of CMD, for disclosure controls and procedures is a matter of public record.

55. The FSA’s finding that such controls and procedures were inadequate, and the reasons in the Final Notice on which this opinion is based, are prejudicial to the Applicant.

Revisions to Shell’s Guidelines in 1998

56. Paragraph 5 of the Final Notice states:

"In 1998 Shell created five Value Creation Teams (‘VCTs’) to find radical new ways to improve Shell’s Exploration and Production business (‘EP’) profitability and reputation and hence aid growth in the EP business. One VCT was tasked with creating the maximum value from Shell’s hydrocarbon reserves. A paper dated May 1998 entitled ‘Creating value through Entrepreneurial Management of Hydrocarbon Resource Values’ made a number of recommendations including changing Shell’s reserves guidelines. On 16 September 1998 the revised guidelines were issued to Shell’s operating units. These revised guidelines resulted in an overstatement of Shell’s proved reserves of 940 million boe for the two years ended 31 December 1999."

57. Paragraph 14 of the Final Notice states that "a further 315 million boe of proved reserves had been incorrectly booked for 2000 as a result of the revised reserve guidelines issued in 1998".

58. The SEC Order associates the Value Creation Team with "EP management". On page 5 of the SEC Order, it is stated that "[i]n 1998, the VCT reported to EP management that Shell was more conservative than its peers in reporting proved developed oil and gas reserves, but that it was ‘early in registering [proved undeveloped] reserves’ relative to competitors".

59. It is well-known from publicly available information, including Shell’s public filings, investor relations materials, and the Executive Summary of the Davis Polk report, that the Applicant was chair of EP’s management at the relevant time. Hence, the Final Notice, when read in conjunction with the SEC Order, identifies the Applicant.

60. The Final Notice prejudices the Applicant because it contains a finding that the Value Creation Team’s recommendation to amend the Shell guidelines in 1998 resulted in an overstatement of Shell’s proved reserves.

"Indications" in 2000 and 2001

61. Paragraph 61 of the Final Notice states:

"The behaviour of Shell considered by the FSA to amount to market abuse is:

…

(e) Shell did not follow up indications in 2000 and 2001 that its disclosed proved reserves were false or misleading …"

62. Paragraph 75 of the Final Notice states:

"(c) Shell either ignored or did not adequately respond to indications and warnings given from January 2000 and:

(i) did not further investigate its true reserves position;

(ii) did not take sufficient steps until December 2003 to address this issue; and

(iii) did not notify the market of its misstatements until 9 January 2004."

63. Paragraph 76 of the Final Notice states:

"Shell’s overstatement of proved reserves, and its delay in correcting the overstatement, resulted from:

(a) its desire to create and maintain the appearance of a strong RRR, a key performance indicator for the oil and gas industry …"

64. These conclusions are based in part on paragraph 12 of the Final Notice which asserts that "[b]y mid-2000, Shell had information indicating that proved reserves figure reported to the market for at least the previous three years may have been overstated. Nonetheless, no further steps were taken to assess the accuracy of its reported proved reserves".

65. This finding appears to be based on paragraphs 8 to 11 of the Final Notice which criticise Shell’s failure to de-book "non-compliant reserves" in the light of an "internal presentation" made on 31 January 2000 which the FSA asserts "showed a reserves replacement ratio (‘RRR’) of 37% for the year ended 31 December 1999". The FSA goes on to state that "[t]his RRR figure was robustly rejected and on 11 April 2000 Shell announced an RRR for 1999 of 56%". The FSA also asserts that the same presentation highlighted concerns in respect of Nigeria that "production forecasts that appeared to have been ‘reverse engineered’ solely to support the reserves figures".

66. The internal presentation in question is identified at page 10 of the SEC Order as a presentation made to "EP management". As noted above, it is well known that the Applicant was a member of EP management at the time. Pages 11-12 of the published Davis Polk Executive Summary identify the Applicant, by name, as having attended this presentation to EP ExCom.

67. The findings of the FSA set out above therefore relate to matters that identify and are prejudicial to the Applicant.

"Warnings" in 2002 and 2003

68. Paragraph 61 of the Final Notice states:

"The behaviour of Shell considered by the FSA to amount to market abuse is:

…

(f) Shell did not follow up warnings in 2002 and 2003 that its disclosed proved reserves were false or misleading …"

69. Paragraph 67 of the Final Notice states:

"Shell’s behaviour was such that it failed to correct the false or misleading proved reserves information it had announced and continued to announce to the market. This failure continued despite warnings that Shell’s announced proved reserves were false or misleading from a number of internal and external sources including:

(a) from staff who were responsible for determining and reporting on Shell’s reserves;

(b) through internal reports, notes, emails, reviews and presentations; and

(c) negative external impacts on Shell's reserves."

70. It is clear from these paragraphs that it is the FSA’s view that senior management at Shell, including the Applicant, ignored the so-called "warnings." This view appears to be based in large part on the "internal Shell memorand[a]" of 11 February 2002, 18 July 2002 and 17 July 2003, referred to at paragraphs 22, 27 and 34 of the Final Notice.

71. These documents are clearly identifiable (from the SEC Order and from the Executive Summary of the Davis Polk report) as EP Notes sent to CMD. As is public knowledge, the Applicant was Chairman of CMD at that time.

72. The above findings therefore relate to matters that identify the Applicant and are plainly prejudicial to him.

THE FSA HAS BREACHED SECTION 393 OF THE FSMA

73. Despite the fact that the Final Notice refers to matters that identify and prejudice him, the Applicant was denied the right to be given a copy of any Warning Notice in respect of the FSA’s proposed decision and the Decision Notice of 13 August 2004.

74. As a result, in respect of a Warning Notice, the Applicant was denied the right to make representations to the FSA under section 393(3) of the FSMA.

75. The Applicant was also denied the right (under sections 393(12) and 394 of the FSMA) to have access to the material on which the FSA relied in taking the decision which gave rise to the obligation to give the notice and any secondary material which, in the opinion of the FSA, might undermine that decision.

76. In respect of the Decision Notice, the Applicant was denied the right (under section 393(9) of the FSMA) to refer to the Tribunal the decision in question and the opinions expressed by the FSA in relation to him.

THE FSA’S REASONS ARE FLAWED

77. Had the FSA completed its investigation and/or afforded the Applicant his right to make representations before issuing its Decision against Shell, the FSA’s findings would have been shown to be fundamentally flawed, as detailed below.

78. Pursuant to section 393(11) of the FSMA, the Applicant will contest before the Tribunal the reasons for the FSA’s decision, so far as they identify and prejudice him and/or express opinions in relation to him.

79. Subject to obtaining disclosure of evidence from the FSA in the Tribunal proceedings and without prejudice to any additional matters that the Applicant may seek to raise, the Applicant contests the following findings for the reasons set out below.

Shell’s reserves estimation involved subjective judgments

80. The opinions in the Final Notice referred to at paras 43 to 44 above alleging that:

80.1 announcements certified by the Applicant were false and misleading;

80.2 Shell knew or ought to have known that reported reserves were non-compliant with Rule 4-10; and

80.3 Shell was either reckless or took insufficient care as to compliance with Rule 4-10,

are not accepted.

81. In particular, these concluded opinions do not take any or adequate account of the following matters:

81.1 The judgments required to apply Rule 4-10 (a copy of which is enclosed at Tab 8A), which defines proved reserves as those "estimated quantities" of oil and gas which are demonstrated with "reasonably certainty" to be recoverable in the future from "known reservoirs under existing economic and operating conditions, i.e., prices and costs as of the date the estimate is made." The application of this rule requires inherently subjective judgments by oil and gas producers.

81.2 The SEC "guidance" of 31 March 2001 (a copy of which is enclosed at Tab 8B), relied upon by the FSA at paragraph 17 of the Final Notice is a non-binding outline of staff views. That document includes a prominent disclaimer by the SEC of any responsibility for the contents of the outline:

"The Securities and Exchange Commission disclaims responsibility for any private publication or statement of any of its employees. This outline was prepared by members of the staff of the Division of Corporation Finance, and does not necessarily reflect the views of the Commission, the Commissioners or other members of the staff."

81.3 During 2002 and 2003 there was ongoing dialogue between Shell and the SEC which included discussion of Shell’s methods for estimating and disclosing proved reserves in its SEC filings.

81.4 Reflecting the subjective nature of estimating such reserves under the applicable rules, Shell’s reported supplementary information on proved oil and gas reserves in its annual reports included the following qualification:

82. The FSA’s opinion that Shell (including the Applicant) failed to establish and maintain adequate internal controls, as indicated in the FSA’s findings referred to at paragraphs 49 to 52 above, is contested insofar as it relates to the Applicant. The Applicant reasonably relied upon established processes and controls to ensure the assessment of reserves by persons with appropriate expertise. In particular:

82.1 Shell undertook annual reviews of its own internal guidelines for assessing proved reserves. In particular, new revised guidelines were issued each year from 1995 to 2003 (inclusive). Prior to revised guidelines being issued, assurance was provided by expert staff from Shell’s EP business and from Shell’s external auditors that the guidelines complied with SEC requirements. During the time that the Applicant was head of EP, EP’s 1998, 1999, and 2000 guidelines explicitly stated:

"[w]here Group guidelines interpret SEC definitions, as listed in Appendix 4, these interpretations have been accepted by external auditors as fulfilling SEC requirements."

The September 2001 revision of Shell’s guidelines, issued several months after the Applicant left EP to become Chairman of CMD, states that:

"Group guidelines are based on SEC definitions, with some interpretations that have been accepted by external auditors …"

82.2 There was an annual process established within Shell for the assessment and disclosure of proved reserves, which included review by the EP Group Hydrocarbons Resource Coordinator, the Group Reserves Auditor and Shell’s external auditors as well as formal assurances provided by senior EP executives.

83.3 Shell’s external auditors provided assurances as to the thoroughness and independence of the EP Group Reserves Auditor:

(a) in March 2002 the external auditors expressed the view to CMD and the Group Audit Committee in their audit of Shell for 2001 that:

"[t]he review process by the Internal Reserves Auditor (a former Shell reservoir engineer) is considered to be thorough and very important from an external audit perspective" (Tab9);

(b) in December 2002, in response to a specific request by Shell’s Group Controller to review the independence of the Group Reserves Auditor’s role, the external auditors stated that:

"[d]uring the time we have worked with [the Group Reserves Auditor] we have regularly assessed his position and experienced him as objective and critical. We therefore concluded his competence and his objectivity as suitable for the review of Supplementary Oil and Gas information" (Tab10); and

(c) in February and March 2003, the external auditors informed CMD and the Group Audit Committee (Tab11) in their audit of Shell for 2002 that they:

"... review the work carried out by the Group Reserves Auditor and discuss the planning, execution, results and conclusions from this work. A detailed report to the CFO-EP is produced each year, and copied to the EP Executive Committee. We review this report with the Reserves Auditor, Business representatives, and Group Reporting and carry out additional review procedures, in accordance with US auditing standards."

(a) inquire of management about the methods of preparing the information, including whether it is measured and presented in accordance with prescribed guidelines;

(b) inquire as to "management’s understanding of the specific requirements for disclosure of the supplementary oil and gas reserves information, including—"

(i) factors considered in determining volume of reserves to be reported; and

(ii) factors considered in determining the standardized measure of future cash flows to be reported;

(c) inquire as to whether the person who estimated the reserve quantity information (i.e. the Group Hydrocarbon Resource Coordinator and Group Reserves Auditor) has appropriate qualifications;

(d) compare the entity’s recent production with reserves estimates for properties having significant production or reserves quantities and inquire about disproportionate ratios;

(e) compare the entity’s reserves information with corresponding information used for depletion and amortization, and inquire if different;

(f) inquire about the calculation of the standardized measure of discounted future net cash flows. The auditor might inquire about whether:

(i) the entity’s estimate of the nature and timing of future development of proved reserves and future rates of production are consistent with available development plans; or

(ii) the entity’s estimate of future development and production costs are based on year-end costs and assumed continuation of existing economic conditions;

(g) inquire whether the entity’s methods and bases for estimating reserves information are documented and the information is current; and

(h) if the auditor believes that the entity’s supplementary information on proved reserves may not be presented in accordance with U.S. GAAP, ordinarily the auditor should make further inquiries. If the auditor cannot adequately evaluate the responses received or still doubts that the supplementary information complies with U.S. GAAP, the auditor "will need to report this limitation on the procedures prescribed by professional standards" in its report on the company’s audited financial statements publicly filed with the SEC:

"Since the supplementary information is not audited and is not a required part of the basic financial statements, the auditor need not add an explanatory paragraph to his report on the audited financial statements to refer to the supplementary information or his limited procedures, except in any of the following circumstances: (a) the supplementary information that the FSAB … requires to be submitted in the circumstances is omitted; (b) the auditor has concluded that the measurement or the presentation of the supplementary information departs materially from the prescribed guidelines; (c) the auditor is unable to complete the prescribed procedures; (d) the auditor is unable to remove substantial doubts about whether the supplementary information conforms to prescribed guidelines." (SAS 52, paragraph .08.)

82.5 Each year, for years prior to 1998 and from 1998 to 2002 inclusive, Shell’s external auditors conducted SAS 52 reviews as described above and never reported being unable to adequately evaluate responses to enquires made of EP or expressed any material doubts that Shell’s supplementary information on oil and gas reserves complied with U.S. GAAP. Shell’s external auditors noted and reported to EP issues they discovered during their SAS 52 reviews as they arose. For example, beginning with the SAS 52 review for fiscal year 1999 and for each year thereafter, Shell's external auditors reported to EP that Shell’s use of "Project Screening Value", as opposed to year-end oil prices, in Shell's production sharing contracts did not accord with SEC rules but was not material to Shell’s financial statements.

82.6 The Applicant appropriately relied on the auditors’ expertise in performing SAS 52 reviews and understood that Shell’s internal guidelines for accounting for proved reserves were reviewed, both internally and externally, and viewed at the time as compliant with SEC requirements by experts in such matters.

Care taken in implementing 1998 Reserves Guidelines

83. The opinions of the FSA in relation to the 1998 revision of the Shell guidelines, referred to at paragraphs 56 to 57 above, are not supported by the evidence. In particular:

83.1 The Applicant contests the FSA’s assertion that the revision of the Shell guidelines "resultedin" overstatements of reserves.

83.2 The FSA appears to have ignored evidence of the care taken within Shell in implementing the revised guidelines. In particular:

(a) the review conducted by the "Value Creation Team" involved internal and external consultation of petroleum engineers and comparison with practices of other major oil companies. Most of the operating units within EP were involved in the process;

(b) the Applicant advised CMD in June 1998 in a Note for Discussion (Tab 12) that, in implementing the "Value Creation Team" recommendations to change Shell’s guidelines for estimating proved oil and gas reserves, EP intended to (and subsequently did):

(i) evaluate the impact of the changes in both volume and financial terms;

(ii) gain commitment to implementation; and

(iii)"ensure that changes are implemented in a proper manner with respect to Group Accounting and Reporting and Investor Relations";

(c) the revision of the guidelines was viewed as moving Shell closer to industry practice and was considered within Shell to be "in full compliance with the FASB and SEC requirements and definitions";

(d) Shell’s Group auditors provided assurance that they were comfortable that the revised guidelines complied with SEC guidelines (Tab 13);

(e) Shell’s external auditors specifically reviewed the 1998 changes to Shell’s guidelines and Shell’s disclosure of the changes in its annual report and viewed them as compliant with U.S. GAAP and SEC requirements; and

(f) EP management required full transparency in the implementation of the guidelines by requiring operating units to quantify how much of any revisions over 1998 of proved reserves was due to the change in the guidelines (Tab 14).

EP’s response to the January 2000 presentation was reasonable

84. The FSA’s findings in relation to the presentation made to EP management on 31 January 2000 (Tab 15) are wrong as they relate to the Applicant:

84.1 EP ExCom decided for appropriate reasons to accept most, but not all, of the presentation’s recommended reserves adjustments with the consequence that the RRR of Shell for 1999, after divestments and acquisitions and excluding oil sands, was approximately 56%. In summary, the EP ExCom took into account the following additional factors in deciding against the adoption of a RRR of 37%:

(a) proved reserves attributable to a buyback contract with the National Iran Oil Company (NIOC) to redevelop the Soroosh and Nowrooz fields in Iran (equivalent of approximately 150 million boe or 11% RRR);

(b) proved reserves in Abu Dhabi (equivalent of approximately 40 million boe or 3% RRR); and

(c) proved reserves in Shell Oil (US) attributable to "own use" or "fuel and flare" volumes (equivalent of approximately 40 million boe or 3% RRR).

84.2 The inclusion of the Iranian and Shell Oil (US) reserves was reviewed by the Group Reserves Auditor and Shell’s external auditors and was in conformity with SFAS 69.

84.3 The recommendation that approximately 40 million boe of reserves in Abu Dhabi be de-booked due to an anticipated licence expiry in early 2014 and because expected growth had not materialised was rejected. This was in part because EP ExCom anticipated that appropriate licence extensions would be obtained within the next 14 years.

84.4 Each of these decisions was made by the EP ExCom in good faith based on existing operating conditions, reviewed by professionals with expertise in oil and gas reserves estimation, and reviewed by independent auditors with expertise in SEC reporting.

84.5 It appears from Shell’s public filings that none of the Iranian, Shell Oil (US) or Abu Dhabi reserves was restated as part of Shell’s proved reserves recategorisation in 2004.

84.6 The acceptance by EP ExCom of a number of the presentation’s other recommendations also contradicts the FSA’s views. For example, had EP, contrary to the presentation’s recommendation, booked Nigerian onshore reserves of approximately 315 million boe, Shell would have added approximately 24% to its 1999 RRR. Instead, EP ExCom followed this and other recommendations which had a negative impact on Shell’s RRR.

84.7 In a letter dated 13 August 2004 the Applicant’s solicitors explained to the FSA how the recommendations in the presentation were dealt with and demonstrated that there is no basis for any assertion that the figure of 56% was arrived at improperly. A copy of the letter to the FSA dated 13 August 2004 is included in Tab 5. In their letter dated 23 August 2004, the FSA assured the Applicant’s solicitors that it would take these matters into consideration in its ongoing investigation. The FSA published its Final Notice, including highly prejudicial findings in relation to the 31 January 2000 presentation, the very next day.

85. Contrary to the FSA’s finding in paragraph 9 of the Final Notice, the presentation contained no reference to production forecasts in Nigeria being "reverse engineered" solely to support reserves figures. The FSA’s reference to production "constrained by licence expiry" derives from the presentation’s statement that:

"The Onshore Licence expires mid-2019 and it is recommended to freeze the onshore proved reserves at the 1.1.1999 level to prevent potential large proved reserves reduction in future, if the planned growth does not or only partially materialises. This means not book the 50 mln m3 oil proved reserves addition for 1.1.2000 as submitted by SPDC. As a consequence proved onshore oil reserves in SPDC will decline with cumulative production in future years until such time that significant growth in oil production volumes has been established or a licence extension has been secured."

Indeed, this is what occurred and the legal right to extend licenses was recognised. Moreover, the FSA failed to mention that EP management, including the Applicant, accepted the recommendations in the presentation in respect of Nigeria.

No "warnings" that reserves information was misleading

86. The FSA’s opinion, referred to at 68 to 69 above that "Shell did not follow up warnings in 2002 and 2003 that its disclosed proved reserves were false or misleading" is inaccurate in that it is based on information provided to the Applicant in the "internal Shell memorand[a]" dated 11 February 2002, 18 July 2002 and 17 July 2003 and sent to CMD.

87. To the extent that any concerns were expressed in the documents about Shell’s reserves, the Applicant acted appropriately and in good faith in addressing those concerns. In any event, these documents contained no warnings to the Applicant that reserves information previously announced by Shell was false or misleading. On the contrary, the Applicant was advised that there was no need for any restatement of the company’s published reserves information. In particular:

87.1 The very first sentence of the Note to CMD of 11 February (Tab 16) stated that the "Group resources situation" figures for end 2001 had been "cleared by external audit" (indeed the external auditors had reported to Shell on 4 February 2002 (Tab 17)).

87.2 No indication was given in the 11 February Note that the proved reserves or RRR figures for 2001 or previous years were false or misleading. No recommendation was made by EP that reserves needed to be de-booked.

87.3 The issues raised under the heading "Exposures" were presented as potential exposures arising from recent SEC clarifications and exposures that might arise should Operating Unit business plans not transpire. EP indicated that these issues were considered important and were being addressed.

87.4 In response to these issues the Applicant specifically asked that EP present a further report in six months time, rather than simply waiting for the next annual reserves reporting cycle.

87.5 The Note for Discussion dated 18 July 2002 (Tab 18) that was presented to CMD in response to the Applicant’s request contained no statement that previously reported reserves information was false or misleading or required to be restated.

87.6 At the CMD meeting on 22 July 2002 the Applicant specifically asked whether any de-bookings were required. As the minutes of the CMD record (Tab 19), he was advised that it was considered unlikely that any de-bookings were required in the short-term. CMD were also assured that "the current internal process required that any reserves booked had to be approved by the Group Controller and also had to pass both an internal and external audit check." The Applicant also requested that "high transparency needs to be maintained both on the existing booked reserves base and on the emerging portfolio hydrocarbon resources …"

87.7 In the period between the July 2002 discussion at CMD and the note to CMD of 17 July 2003, Shell conducted its established process for compiling and reporting annual reserves information. That process included, as usual, reviews by the Group Reserves Auditor and the external auditors.

87.8 In late 2002, after extensive consideration, a decision was made within EP to maintain the bookings in the Gorgon field.

87.9 It appears from the documentary evidence available to the Applicant that, within the EP organisation, considerable attention was being paid to reserves bookings. For example, on 4 December 2002, the EP Group Hydrocarbons Resource Coordinator told the EP CEO that "[i]t would be defensible to leave all bookings intact" (Tab 20). Contrary to the FSA’s finding, the Applicant was not "warned" that previously reported reserves information was false or misleading.

87.10 The Applicant was told that the reserves information published for 2002 complied with U.S. accounting standards and SEC rules. Formal assurance was provided by EP executives as to the accuracy of the information. No material issues had been raised by the Group Reserves Auditor (Tab 21) who specifically assessed proved reserves in relation to each of the issues raised in the 11 February 2002 Note, including Ormen Lange and Gorgon, as satisfying SEC requirements. He assessed "potential exposures" as amounting to just 1% of the reserves portfolio, noting that the issue in relation to Nigeria SPDC had now been removed by recent recognition that there was a right to extend production licences.

87.11 In reporting on their SAS 52 review of Shell’s oil and gas supplementary information for 2002, the external auditors specifically addressed the same issues, including PDO Oman, Nigeria SPDC, Kashagan, Wadenzee and Ormen Lange. They also assessed those areas where they had "uncertainties" as to compliance with SFAS 69 as accounting for just 1% of total proved reserves (Tab 22).

87.12 It was against this background that EP presented the 17 July 2003 paper to CMD (Tab 23). The Note to CMD, far from warning the Applicant, provided reassurance.

87.13 The reserves exposure catalogue appended to that Note reflects EP’s assessment that no de-booking was required and provided added assurance that any "potential" exposure would be more than offset by the "potential" to include gas "fuel and flare" volumes. Contrary to paragraph 35 of the Final Notice, there was no statement to CMD that suggested a total of approximately 2,600 million boe was "potentially at risk of non-compliance with Rule 4-10". The catalogue disclosed a range of issues across different fields that were being actively addressed within EP and the Note from EP contained the explicit statement that "[a]t this stage, no action in relation to the Catalogue is recommended".

87.14 In order to ensure full transparency of the issues relating to reserves, the Applicant requested that a report be made by EP to the Group Audit Committee. Substantially the same information to that contained in the CMD paper of 17 July 2003 was provided by EP to CMD as a Note For Information on 1 September and to the Group Audit Committee and to the external auditors for the 21 October Group Audit Committee meeting in the memorandum dated 26 August 2003 (Tab 24) and referred to at paragraph 36 of the Final Notice. Neither the Group Audit Committee nor the external auditors raised any concerns with respect to the memorandum’s contents or Shell’s supplementary information on proved reserves filed with the SEC.

87.15 When CMD was informed of the unsatisfactory audit reports in relation to Nigeria SPDC and Oman on 18 November 2003 (Tab 25), the Applicant initiated a rigorous review of Shell’s proved reserves that resulted in Shell’s prompt restatement on 9 January 2004.

88. For the reasons set out above, the Applicant contests the FSA’s findings in respect of him and asserts that he acted properly in all the circumstances.

REFERENCE TO THE TRIBUNAL

89. Accordingly, pursuant to section 393(11) of the FSMA 2000, the Applicant refers to the Tribunal:

89.1 the failure of the FSA to give him a copy of the Decision Notice;

89.2 the decision in question insofar as it is based on reasons that relate to matters that identify and are prejudicial to the Applicant; and

89.3 the opinions expressed by the FSA in relation to him in the Decision Notice.

RELIEF SOUGHT

90. The Applicant asks that the Tribunal:

90.1 find that the Applicant was identified and prejudiced by the Final Notice and should have been given a copy of the Decision Notice;

90.2 make findings on the evidence available to the FSA as at the date of the Decision Notice and such other evidence it becomes aware of from the Applicant during the course of the proceedings; and

90.3 direct that the FSA amend the reasons stated in the Final Notice to reflect the Tribunal’s findings on the evidence.

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